Hobby vs. Business

Our customers ask us some really, really GOOD questions, and this is one of them:

"I have a side thing like a 'business' with a friend, we makes model airplanes. We both have full-time jobs and we have a website, but it doesn't make much money and we do it just for fun. By the time we add expenses, we usually aren't actually making a profit. I haven't filed taxes yet, I'm wondering because I've heard it's considered a hobby if you don't make more than $450. Is that correct? "

Since we are not tax professionals, here is something to consider in making this determination, taxpayers should consider the following factors:

Does the time and effort put into the activity indicate an intention to make a profit?

Does the taxpayer depend on income from the activity?

If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

Has the taxpayer changed methods of operation to improve profitability?

Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

Does the activity make a profit in some years?

Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

*** The IRS will generally accept your characterization if it is supported by facts and circumstances.